Threat to small shareholders

PRE-EMPTION rights sound more as though they belong in a ritual of the Roman Catholic church than in the lexicon of stock market investment. But pre-emption is a subject to set the pulse of even the most hard-bitten City fund manager racing. And it is of crucial importance to small shareholders too.

The issue has resurfaced after the Government's decision to ask Marks & Spencer chairman Paul Myners to examine if there is a case for relaxing the current pre-emption rules.

Broadly, these say companies cannot issue more than 5% of their share capital a year, or 7.5% over three years, without giving existing investors right of first refusal.

The rationale is to ensure that those who hold shares in a company do not see their stakes diluted by others climbing aboard, almost certainly at a more favourable price.

The Government has decided to inflame City angst by opening this arcane can of worms, following intense lobbying by the biotechnology sector - one of the industries most beloved of this administration.

Biotechs claim pre-emption is holding back their ability to raise money to finance research into new drugs and needlessly puts them on the back foot in their attempt to compete with American rivals.

Much of this is rubbish. These companies might have more of a case if they were making profits rather than swimming in seas of red ink, and if they could demonstrate more than a tepid record of bringing successful drugs to market.

They argue that as share prices in their sector are volatile and fund-raising rights issues can take some time to get away, windows of opportunity could be missed.

Yes, some of the insurance companies that traditionally underwrote rights issues are more constrained, but they can still act at the drop of a hat if they're interested, particularly if they're offered a nice profit for acting as the ultimate backstop by picking up shares no-one else wants.

There is also the option of a deeply discounted rights issue that can be carried out without having to get it underwritten.

The biotech companies appear to be taking a very odd approach to their shareholders - the people who own their businesses, after all.

They could always argue that shareholders should agree to allow them, like others before them, to issue more than 5% of shares without pre-emption. It may not be the 20% or 25% American biotechs are allowed. But there are precedents for 10% or 15%.

And these companies should be working on a relationship with shareholders whereby long-term holders would have confidence to invest more, even though shares tend to fluctuate greatly.

Fund managers sometimes understand the underlying business well enough to ignore short-term fluctuations in the share price and would be prepared to plough in more money even when prices looks less than propitious.

The fund managers in the sight lines of the biotechs (and possibly, implicitly, of the Government) have been accused by Myners of dinosaur attitudes and an unwillingness to contemplate changes to the rules even before his discussion has got going.

There I have some sympathy. Even the most tried and tested practices should be re-evaluated every now and again. But there are a couple of points to make. If the wall is breached by pleading from the biotech industry then which other ' special' sector is next in line?

And if pre-emption is scrapped, big City institutions that hold, say, 10% of a biotech company will still be able to twist the company's arm to give them access to 10% of a share offer. Almost invariably, these are priced at a discount.

The people who will not be able to muscle in on all this are small shareholders who will see their stakes diluted while others are allowed to make a killing.

Burning issue of gas

THE wholesale price of gas has shot up by 45% this year. And next year will see a further 30% leap.

The result? Misery for consumers, who face huge increases in their bills - and the grim prospect that British industry will be forced into short-time working this winter.

On the Continent, however, households and businesses are paying 30%, even though, unlike UK plc, they do not have the benefit of North Sea gas.

So what is going on? The energy regulator, Ofgem, has been looking into the issue for nine months and will report soon. But don't hold your breath. At best, it will say it cannot offer a solution.

There can be only two reasons for this rip-off. Either some of the biggest energy companies have been colluding to keep prices high - a suggestion fiercely denied by producers - or the market on the Continent does not work properly and there are hidden subsidies.

Given the issue's importance to consumers, industry and the economy, it beggars belief that the Government is not making more effort to discover what is going on.